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The Fed Will Fail and Take the Private Economy Down With It: David Stockman

The Great Recession of 2007-2009 was neither great nor a recession, says David Stockman, the former Reagan budget director, private equity investor and author.

In his new book The Great Deformation: The Corruption of Capitalism in America, Stockman laments the condition of the world’s largest economy not because of the recent financial economic crisis but because of the government’s reaction to it. According to Stockman, the last recession wasn’t worse than the 1980-1982 recession and the economy now is “imperiled” by the “state and its central banking branch,”aka the Federal Reserve.

“The Fed has become 'a central planning agency' for the economy and should return to its traditional role of the 'bankers’ bank' rather than an 'activist' economic manager," Stockman tells The Daily Ticker.

The Fed is “like a wet blanket all over the economy," he adds. “Everything is being micromanaged, maneuvered by them … they will fail and take the private enterprise economy down with it.”

He’s equally critical of government programs designed to revive a flailing economy, from Roosevelt’s "New Deal" through Johnson’s “Great Society,” Reagan’s “Morning in America" and most recently the Obama stimulus.

The federal government and the Fed have “become the tools of a vicious form of crony capitalism and money politics and are in thrall to a statist policy ideology common to all three branches of today’s Washington economics: Keynesianism, monetarism and supply side-ism,” writes Stockman in his book. But now, he says, “A Keynesian state-wreck is at hand.”

The cause of that train wreck? The growing debt burden that Washington is piling on to finance a “warfare state” and “welfare state.” Instead of raising taxes to pay for it, the Fed resorts to a “spree of money printing,” says Stockman.

In an op-ed in the Sunday New York Times, Stockman writes that another asset bubble is being created in the stock market that will inevitably burst. But unlike the last financial crisis, the next one won’t be followed by corporate bailouts. Once this bubble bursts, “America will descend into an era of zero-sum austerity and virulent political conflict," Stockman writes.

Stockman’s analysis and doomsday scenarios are attracting lots of criticism. Nobel prize-winning economist and New York Times Columnist Paul Krugman calls Stockman out for writing about runaway deficits: "We didn’t have anything you could call a deficit problem until 1980. We then saw rising debt under Reagan-Bush; falling debt under Clinton; rising under Bush II; and a sharp rise in the aftermath of the financial crisis. This is not a bipartisan problem of runaway deficits!”

John Tamney, editor of RealClearMarkets and senior economic advisor to H.C. Wainwright Opinions, writes in his blog that Stockman’s protests "have blinded him to the real crisis which is government spending, not deficits."

At the end of his book Stockman lists 13 prescriptions to help reverse “the Great Deformation” including a six-year term limit for all Congressional members and the president; a limited mandate for the Fed; a 30% wealth tax; two-thirds cut in the armed forces; a balanced budget and means-tested safety nets. These are recommendations that will anger liberals as well as conservatives. But he tells The Daily Ticker, “None of these are going to happen. The crony capitalists who benefit both in Washington and on Wall Street will never let it change.”